Understanding capital formation process holds water as capital fuels the economic growth and improves living standards.
Capital formation is a process that includes cultivating savings habits of portion of income, mobilization of such saving from all possible means.
And, thoughtful planning to invest in the productive activities to power economic growth. So, generating capital by constant saving habit is utmost important. Such capital is used to purchase capital goods to increase production as well as efficiency of workers.
Definition of capital formation
For layman’s understanding, capital formation means accumulation of money by saving. It is done out of regular income avoiding unnecessary expenditure.
Obviously, purpose of saving is to maximize the value of original capital they saved. No doubt that investor receives investment income in return in the form of lump sum return or fixed interest.
Quality employment opportunities, inflation, adequate supply of goods and services, interest rates are determining factors for the savings and capital formation.
Understandably, better employments, low inflation, and adequate supply of goods and services good for capital formation.
Logically, household saving is very instrumental in the process of capital formation because it is too difficult to generate surplus if it is carrying current account deficit.
Importance of capital formation
Capital act as fuel for the growth of any economy. It is essential to purchase capital goods, machineries, equipments, expertise, skills, and other factors of production to begin productive activities.
At the same time, capital doesn’t useful only to purchase physical goods but increase human capital like education, health, skills etc.
Simply put, capital formation is a prerequisite condition before to begin any business or productive activities.
Finally, with abundant capital, it is possible to generate adequate goods and services, employment opportunities, living standards, efficient usage of resources, and taxes for government exchaquer.
Encouraging capital formation
Investors should be assured about the lucrative income on saving. Policy interventions should cultivate the saving habit among people or community. With the proper regulations and security, investors should be assured safety of theirs investment from scams and frauds.
Second, money saved by people should be accumulated by proper means like mutual funds, post office savings, or fixed deposits. And, such funds should be channelized in the most priority sectors to boost production.
By doing so, investors would be more richer and they have enough at hand to spend more for higher standards of living.
If there is more surplus of goods and services than country requires, export of such goods and services could be encouraged. Consequently, country can improve trade balance and generate current account surplus to invest more to power economic growth.
Last words on understanding capital formation
So far, we have learnt how to cultivate the saving habit among people. Next, it is also important to accumulate the saved money by the means of mutual funds, post office savings and fixed deposits.
In this way, by speeding capital formation, the whole cycle of economic development can be accelerated. As you, as economics student, know that the capital acts as fuel for economic Economic growth and development
When the economic growth cycle moves, there will be more jobs, more production, consumption, and revenue for exchaquer.
This remains the ultimate goal of any governing agency. And, to do so, there should be collective efforts by all means.
Key points of understanding capital formation
The degree of saving underpins the level of capital formation.
Saving is done by avoiding unnecessary expenditure and keeping certain portion of amount out of income regularly.
Capital formed by the domestic, as well as public.
Employment opportunities, inflation,taxes, supply of goods and services, interest rates etc.are determining factors of capital formation.
Government policies play big role in cultivating saving habits.
Saved money should be channalized by mutual funds, FDs, post office savings in more productive economic activities.
Finally, capital acts as fuel for economic growth and living standards of people.
Solved questions on capital formation
Now, let’s see some useful solved questions for beginners in economics discipline on understanding capital formation process.
Q.1. What is saving?
Ans: Saving is a conscious process that includes deliberate avoidance of unnecessary expenditure. Consequently, you can put aside certain portion of income out of daily expenditure. There are two types of savings. One is domestic savings and other public.
Q. 2. What does capital formation mean?
Ans: Capital formation is a process that includes cultivating saving habits of portion of income, mobilization of such saving by all means. The ultimate goal is to fuel productive activities and improve living standards.
Q. 3. What are the factors of saving and capital formation?
Ans: Quality employment opportunities, inflation, adequate supply of goods and services, interest rates are determining factors for the savings and capital formation.
Q. 4. How to encourage savings?
Ans: Like, money saved by people should be accumulated by proper means like mutual funds, post office savings, or fixed deposits. And, such funds should be channelized in the most priority sectors to boost production, increase consumption and revenue for exchaquer.
Explaining Balance of payments
Climate change causes and impacts